Monetary Policy, Heterogeneous Expectations and Structural Uncertainty
29 Pages Posted: 27 Sep 2017
Date Written: April 4, 2017
This paper shows that monetary policy does and should respond systematically to time variation in ex-ante uncertainty and heterogeneity in private sector’s views over the business cycle. Empirical tests are initially conducted on the basis of an augmented forward-looking Taylor rule framework, modified to account for learning and robustness. Normative justification is further provided by evaluating the optimal forecast-based monetary policy response under imperfect knowledge given a set of heterogeneous nested reference structural models, estimated to best fit private sector’s forecasts in addition to contemporaneous data.
Keywords: imperfect knowledge, model uncertainty, time-varying natural rates, risk and uncertainty, disagreement, heterogeneity, non-linearities
JEL Classification: E52, E42, E44, E47, G12
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